Lawyers at major firm sound off on reverse mortgage issues

Overlooking government status

Litigation in the reverse mortgage space is not a new idea, but plaintiffs’ attorneys tend to miss some key facts about the product according to partner Jason Manning. While understanding that the Federal Housing Administration (FHA) Home Equity Conversion Mortgage (HECM) program serves a vulnerable population, these attorneys tend to overlook the nature of the program itself.

“This is a government program,” he said. “This is a government product. It is regulated by [the U.S. Department of Housing and Urban Development (HUD)]. The government is insuring it. And so, there’s a whole series of guidelines that servicers need to follow for compliance, but by following for compliance, you’re able to demonstrate that exactly that concern has been addressed.”

The requirement for borrowers to undergo a session with a HUD-certified counselor is one element of this, as are the “additional services and notices that are required” as part of the HECM program.

“If you comply, you’re able to demonstrate very credibly to plaintiff’s attorneys that this was done exactly as the government required, and this is a program that the government believes is beneficial to that population,” Manning said.

Non-borrowing spouses

Associate attorney Punit Marwaha also highlighted different kinds of reverse mortgage cases that have come up, including class and individual litigation. He mentioned non-borrowing spouse cases, and the measures that HUD and FHA have taken to address any concerns for non-borrowing occupants. The Mortgagee Optional Election (MOE) assignment, introduced in 2015, is a chief example.

“In a lot of the situations that we’ve seen, it’s been foreclosure filed due to the death of the borrowing spouse,” Marwaha said. “Non-borrowing spouse comes in and says, ‘This is inequitable. Why am I being kicked out of my house I lived in for 30 years?’ In those situations, we have often utilized this MOE assignment program to resolve the litigation, which allows the non-borrowing spouse to stay in the house, resolves the foreclosure, and at least on the servicer end, makes it HUD’s problem.”

Manning added that FHA does not want HECM foreclosures to occur if they’re going to trigger a payout.

“So, the government has done a really good job of providing at-risk programs, which are available and often utilized for resolving individual litigation,” he said.

Home repair scams, fraud

There have also been instances that Marwaha has seen involving fraud, in which a third-party scouted an area for older homeowners and told them about “home repairs under a free government program, or a free city program, and have the elderly homeowner fill out paperwork for a reverse mortgage.”

They then abscond with the loan’s proceeds, and a family member later only learns about a reverse mortgage after the homeowner’s death when they receive a foreclosure notice.

“Those cases that we’ve dealt with have typically involved a third party, not a family member to the borrower, coming in and making these promises of home repairs and pocketing the proceeds from the reverse mortgage,” Marwaha said.

“There, we have — generally using agency arguments — [have said] that there was no agency between the original lender of the mortgage and the third party who dealt with the borrower. We typically had a lot of success in the courts with this argument, because it’s trying to tie in the mortgage broker or a third party to the original lender.”

But this can be a tall order for the family members or heirs, he added, because fraud comes with a “heightened pleading standard” and documents are often executed with the same handwriting as the homeowner, making it difficult to argue they didn’t understand what they were signing.

In instances of identified elder financial abuse, “there are general civil and criminal penalties that go along with that, which do vary from state to state,” he said. “But generally, those are going to be more the issue of the third party who is helping originate the loan, rather than the mortgage servicer itself.”

Manning added that in such instances, the loan originator as well as the servicer are also harmed by the fraud. But in other instances, fraud allegations are “meritless,” he said.

“You really have a lot of HUD guidelines and HUD documentation that can support that on behalf of the servicer or the originator,” Manning said. “For example, part of the origination process requires a HUD-certified counselor, and also a HUD-certified designation of net benefit to the borrower. Both of those are very useful for defending allegations of alleged fraud.”